Is the Mutual Investment Model PFI lite?

Mike Hedges AM considers the implications of the Welsh Government’s Mutual Investment Model

Mike Hedges is Assembly Member for Swansea East

Whilst alchemists want to turn base metal into gold, politicians want to get private money cheaply into public projects thus avoiding falling foul of the public sector borrowing requirement and being capped by the Treasury.

 

The latest attempt in Wales is the Mutual Investment Model that levers in private capital to support public sector projects.

 

When launching the Mutual Investment Model the now First Minister when he was Finance Minister said:

 

“The Mutual Investment Model includes important obligatory long-term provisions to secure community benefits, to create apprenticeships and training places for Welsh workers and for sustainable development, in which the private sector partner supports delivery of the Well-being of Future Generations Act.

 

It incorporates our commitment to an ethical employment code and allows us to maximise the benefits of our sustainable procurement practices. The model also enables the government to exert influence over the chosen private partner to ensure that the public interest is protected.

 

Where we invest in schemes, this influence will be exercised by a public interest director, and this is an important advance on what has been secured in other public-private partnership models in other parts of the United Kingdom. This ensures robust transparency in terms of access to board-level information, alongside a range of reserved matters to protect public funds and the public interest.”

 

The current Finance Minister said in Plenary in February 2019:

 

“From the outset, our intention has always been to ensure that the Mutual Investment Model promotes the public interest in the widest possible definition of that term. To that end, the model will deliver positive, additional outcomes in relation to wellbeing, value for money, and transparency; and in so doing will avoid many of the criticisms levied at historic forms of public-private partnership – in some cases, criticisms that the Welsh Government was among the first to raise. For example, you will recall that successive Welsh Governments have criticised the now discredited form of PFI.

 

In relation to well-being, private partners with whom we contract using the Mutual Investment Model will be obliged to help the government deliver the objectives of the Well-being of Future Generations Act. They will need to deliver stretching community benefits, with penalties for non-delivery. They will need to adopt the Code of Practice Ethical Employment in Supply Chains. And they will need to build our infrastructure with long-term sustainability and environmental efficiency in mind.

 

We will require all MIM schemes to be subject to the rigorous investment appraisal of the Five Case Model – an internationally accredited appraisal tool, co-owned by the Welsh Government. The G20 Finance Ministers have adopted the model’s principles as the basis for a global standard for infrastructure investment appraisal.

 

We have also developed a new project assurance tool that all MIM schemes will be subject to – Commercial Approval Point checks. We have run two of these checks on the dualling of the A465. These checks have been supported by experts from the European Investment Bank and the UK Infrastructure and Projects Authority.

 

I am convinced that rigorous investment appraisal, coupled with robust project assurance delivered by undoubted experts, will result not only in a better understanding of the risks involved in the delivery of major infrastructure projects, but also in a more credible appreciation of the value for money of such projects, and their affordability.

 

To increase the value for money of our schemes, we have taken a conscious decision not to use the Mutual Investment Model to finance soft services, such as cleaning and catering, which was one of major criticisms of previous PFI contracts. Nor will it be used to finance capital equipment.

 

With regard to transparency, the government intends to invest a small amount of risk capital in each scheme, ensuring that the public sector participates in any return on investment. This shareholding will be managed by a director appointed under the direction of Welsh Ministers onto the boards of those companies delivering our assets.”

 

Reading the above should we be reassured?

 

My concern is that when you strip away all the warm words what is being done is paying for private capital over a long period of time. Those providing the capital will be looking for a rate of return higher than the cost of borrowing for local authorities from the Public Works Loan Board (PWLB) and will also be looking to minimise their risk.

 

Whilst the worst excesses of PFI –such as not financing soft services and capital equipment, and charges such as the £20 to change a light bulb – will not occur, it is still a long term commitment which will have an effect on revenue budgets for decades.

 

For schools it would be cheaper for the Welsh Government to fund local authority borrowing to pay for the building of the schools and let them borrow from the PWLB.

 

Until we are told the final cost of projects and the cost of borrowing we cannot be sure how expensive Mutual Investment Model projects will be. What we do know is that PFI projects passed Westminster tests for value for money when being agreed and that the private sector will look to maximise return and minimise risk (this is not a criticism as they would be letting down their shareholders if they did otherwise).

 

This is obviously private finance, but on a project by project basis we will need to know the lifetime cost and the rate of return being achieved by the private sector.

 

All articles published on Click on Wales are subject to IWA’s disclaimer.

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